System for pricing financial instruments

• US 7,305,362 B2
• Filed: 04/16/2002
• Issued: 12/04/2007
• Est. Priority Date: 03/18/2002
• Status: Active Grant

• Current Assignee: NYSE American LLC (Intercontinental Exchange, Inc.)
• Original Assignee: American Stock Exchange, LLC (Intercontinental Exchange, Inc.)
• Inventors: Gastineau, Gary L., Alexander, Carol, Weber, Clifford J., Baker, Charles A., MacQueen, Jason, Norman, Terry
• Primary Examiner(s): Kazimi; Hani M.
• Assistant Examiner(s): Zecher; Michael R
• Application Number:
  US10/123,779
• Publication Number:
  US 20030177077A1
• Time in Patent Office: 2,058 Days
• Field of Search: None
• US Class Current: 705/36.00R
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A method of determining an estimate of the market value of a traded unit of a financial instrument, and apparatus for carrying out the method, said instrument comprising a fund of individually priced securities and the exact composition of said fund being withheld from the market, said method comprising selecting a plurality of mutually independent risk factors, each risk factor being representative of market behavior estimated to be significant to the price behavior of the traded unit, obtaining information from a third party holding information regarding the composition of said fund regarding the actual significance of said risk factors to the value of said traded unit, and calculating a value for said traded unit on the basis of said significances.

Claims

1. A method of determining an estimate of the market value of a traded unit a financial instrument, said instrument comprising a fund of individually priced securities and the exact composition of said fund being withheld from the market, said method comprising selecting a plurality of risk factors, each risk factor being representative of market behavior estimated to be significant to the price behavior of the traded unit, obtaining information from a third party holding information regarding the composition of said fund regarding the actual significance of said risk factors to the value of said traded unit, and calculating a value for said traded unit on the basis of said significances.

2. A method in accordance with claim 1 wherein said step of selecting risk factors includes the further steps of selecting a plurality of mutually independent risk factors, measuring correlation between instruments traded in said market, constructing a matrix of said measured correlations, and extracting from said matrix a plurality of eigenvectors representing combinations of instruments in determined weighted combinations representative of correlations in the behavior of instruments on the market.

3. A method in accordance with claim 2 wherein said step of selecting risk factors further includes the steps of extracting, with said eigenvectors, corresponding eigenvalues, determining, on the basis of relative magnitude of said eigenvalues, the relative importance of said eigenvectors in determining the behavior of prices of said instruments on said market, and selecting, on the basis of a predetermined threshold, a sufficient number of said eigenvectors as risk factors for use in determining the estimated price of said traded unit.

4. A method in accordance with claim 3 wherein the step of selecting on the basis of a predetermined threshold comprises processing said eigenvectors in descending order of magnitude of corresponding eigenvalues, and selecting the eigenvectors having largest eigenvalue magnitudes such that the smallest number of eigenvectors are selected that the sum of the magnitudes of their respective eigenvalues is at least the predetermined threshold.

5. A method in accordance with claim 2 and further including the steps of defining a set of instruments traded on said market and from which said fund can be composed, measuring, over a predetermined period, trading activity in each instrument in said set, and defining a subset of said set as comprising instruments having trading activity above a certain threshold of a given predetermined measure.

6. A method in accordance with claim 5 wherein said predetermined measure is a measure of price liquidity.

7. A method in accordance with claim 6 wherein said measure of price liquidity comprises a count, over a predetermined period, of the number of occasions wherein a price changes more than a predetermined amount in a predetermined sample time period.

8. A method in accordance with claim 7 wherein said price change is determined as a difference between logarithms of prices at the beginning and end of a sample time period.

9. A method in accordance with claim 3 and further including the steps of defining a set of instruments traded on said market and from which said fund can be composed, measuring, over a predetermined period, trading activity in each instrument in said set, and defining a subset of said set as comprising instruments having trading activity above a certain threshold of a given predetermined measure.

10. A method in accordance with claim 9 wherein said predetermined measure is a measure of price liquidity.

11. A method in accordance with claim 10 wherein said measure of price liquidity comprises a count, over a predetermined period, of the number of occasions wherein a price changes more than a predetermined amount in a predetermined sample time period.

12. A method in accordance with claim 11 wherein said price change is determined as a difference between logarithms of prices at the beginning and end of a sample time period.

13. A method in accordance with claim 4 and further including the steps of defining a set of instruments traded on said market and from which said fund can be composed, measuring, over a predetermined period, trading activity in each instrument in said set, and defining a subset of said set as comprising instruments having trading activity above a certain threshold of a given predetermined measure.

14. A method in accordance with claim 13 wherein said predetermined measure is a measure of price liquidity.

15. A method in accordance with claim 14 wherein said measure of price liquidity comprises a count, over a predetermined period, of the number of occasions wherein a price changes more than a predetermined amount in a predetermined sample time period.

16. A method in accordance with claim 15 wherein said price change is determined as a difference between logarithms of prices at the beginning and end of a sample time period.